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What is mortgage insurance?

If you’re a first-time homebuyer, you may wonder, “What is mortgage insurance, and do I need it?”. To answer this question, here’s a quick guide with everything you need to know about mortgage insurance. 

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What is mortgage insurance in Canada?

In Canada, mortgage insurance works as a “safety net” designed to protect lenders if a borrower defaults on their mortgage payments. 

Mortgage loan insurance, also called mortgage default insurance, is required by the government for high-ratio mortgages. High-ratio mortgages, now called “insured mortgages,” are mortgages wherein borrowers put less than 20% as a down payment. The mortgage covers more than 80% of the purchase price of the home. The purchase price of the home must be below $1,000,000.  

In contrast, a low-ratio mortgage, now referred to as an “uninsured mortgage,” is when borrowers put 20% or more as a down payment. The mortgage covers up to 80% of the purchase price of the home. Mortgage insurance is also available for this mortgage loan; however, it is not mandatory. But there may be times when it is advantageous to have this type of mortgage coverage. 

How mortgage insurance works

If the purchase price is below $1,000,000 and your down payment amount is less than 20%, you’ll be required to buy mortgage loan insurance.  The fee for mortgage insurance is called a premium. This premium is added by the mortgage lender on top of your mortgage loan amount, increasing the overall size of your mortgage. 

There are three mortgage insurance providers in Canada at this time, and it will be the lender who chooses which provider they are going to use for your mortgage loan

The providers include: 

 You can choose to pay for the mortgage insurance premium upfront in a lump sum payment at the time of closing, or it can be added to the mortgage and will form part of the mortgage payment. 

Types of mortgage coverage

It is helpful to understand the three types of mortgage types: when insurance is required, when its optional and when it is not available.

Insured Mortgages – mortgage insurance coverage is required when the down payment is less than 20%. This insurance can remain in place for the life of the mortgage if the mortgage remains with the same lender or transfers to a new lender with no changes to the amount or original amortization period. 

To qualify for mortgage loan insurance, the following rules apply:

  • if the home purchase price is $500,000 or less, you’ll need a minimum down payment of 5%, 
  • if the home purchase price is more than $500,000, you’ll need a minimum of 5% down payment on the first $500,000 plus a 10% down payment on the remainder, 
  • if the home purchase price is $1,000,000 or more, mortgage insurance is not available.  

Insurable Mortgages – optional mortgage insurance coverage occurs when 20% or more of a down payment is made when purchasing a home. If the mortgage meets all the other insured qualifying criteria for the lender and insurers (like the maximum 25-year amortization, credit and income debt servicing requirements), then you may choose to apply to make the mortgage insurable. The cost of the insurance premium may or may not be covered by the lender; the loan-to-value and purpose of the loan may determine this on a lender-by-lender basis.  

The primary reason to opt for mortgage insurance would be to obtain a better rate. You would have to weigh any savings of a lower rate versus the cost of the mortgage insurance premium. These mortgages are also limited to a maximum 25-year amortization period, just like insured mortgages, and the original purchase price of the property would have to have been less than $1,000,000. 

Uninsured Mortgages – there are times when a mortgage may not qualify for mortgage insurance and therefore would be uninsurable. These cases include

  • where the property purchase price is $1,000,000 or greater, or 
  • you’re putting 20% or more down payment on the purchase, or 
  • buying a property that is a rental or investment property, or 
  • refinancing an existing mortgage. 

How much is mortgage insurance?

Mortgage insurance premiums are based on a percentage of the loan amount and vary depending on the Loan-to-Value ratio (LTV) of the mortgage. 

Typically, higher LTVs are associated with high-ratio insured mortgages. Here are some examples of mortgage insurance premiums charged based on the LTV ratio: 

Loan-to-Value  Standard Purchase Premium 
Up to and including 65%  0.60% 
Up to and including 75%  1.70% 
Up to and including 80%  2.40% 
Up to and including 85%  2.80% 
Up to and including 90%  3.10% 
Up to and including 95%   4.00% 

Source: CMHC 

For example, suppose you purchase a home for $400,000 and make a down payment of $40,000. Your mortgage loan insurance will be calculated like this: 

  • $400,000 (home price) – $40,000 (down payment) = $360,000 (mortgage before insurance) 
  • $360,000 (mortgage before insurance) divided by $400,000 (home price) = 90% (LTV) 
  • $360,000 (mortgage before insurance) x 3.10% (insurance premium percentage) = $11,160 (insurance premium) 
  • $371,160 (mortgage amount including insurance premium) 

This is the most basic way to calculate your mortgage insurance. 

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What's the minimum down payment with mortgage default insurance?

The minimum down payment required for mortgage loan insurance depends on the purchase price of your home. 

Purchase price of your home  Minimum amount of down payment 
$500,000 or less 
  • 5% of the purchase price 
$500,000 to $999,999 
  • 5% of the first $500,000 of the purchase price 
  • 10% for the remaining portion of the purchase price  
$1,000,000+ 
  • 20% of the purchase price 

Suppose you purchase a home for $700,000. You can calculate the minimum down payment by adding two amounts.  

  • Start by computing 5% of the first $500,000, which is $25,000.  
  • Next, compute the 10% of the remaining $200,000, which is $20,000.  
  • Add the two together and your total minimum down payment will be $45,000. 

How to avoid paying mortgage insurance?

Mortgage terms are available in several term lengths. At the end of the term, homeowners must either renew into a new term with the same lender or transfer to a new lender and select a new rate and term. This is another benefit of working with a mortgage broker; they can shop around for you to find the best mortgage rates and terms that can meet your financial needs.

The most straightforward way to avoid paying mortgage insurance is to increase the down payment. Not only will it save you from paying the mortgage insurance cost, but it may also save you thousands of dollars in interest charges. 

NOTE: if the difference between the Insured rate and the uninsured rate is large, then it may be beneficial to opt for mortgage insurance. Every borrower’s situation is specific and needs to be discussed with a mortgage professional.   

Now, let us go back to our first example of a $400,000 home purchase with a $40,000 down payment. Here’s how increasing the size of the down payment affects the cost of the mortgage:
 

Down payment  Down payment amount  Mortgage  Loan-to-Value  Mortgage loan insurance premium  Mortgage (including insurance premium) 
5%  $20,000  $380,000  95%  $15,200  $395,200 
10%  $40,000  $360,000  90%  $11,160  $371,160 
20%  $80,000  $320,000  80%  Not required  $320,000 

Other ways to increase your down payment include restructuring your budget to save more, buying a cheaper home, or using your Registered Retirement Savings Plan (RRSP) as part of the RRSP Home Buyer’s Plan.

Other types of home insurance

Title insurance

Title insurance protects the borrower or lender against loss or damage due to problems in the title of the property. Titles, or deeds, are proof of land or property ownership. There are two types of title insurance: 

  • Lender title insurance: This is a one-time fee collected when the mortgage is registered. This type of title insurance is mandatory and is required by lenders to their borrowers. Lender title insurance will protect the lender in the event of a defect, error or omission on the title of the mortgaged property, an unknown existing lien against the title, setback violations, and other risks. This will not protect the homeowner or the borrower, which is why it is recommended to purchase the second type of title insurance.
     
  • Borrower title insurance: This is an optional title insurance that carries the same benefits as the lender title insurance but with added coverage for the homeowner or borrower. 

Homeowners insurance

Often called fire insurance, earthquake insurance, and natural disaster insurance, homeowners insurance refers to a type of property insurance that covers loss and damage to an individual’s home. 

A homeowners insurance policy is mandatory if you want to mortgage the property, as lenders will want to secure the property against various risks. 

Contents insurance

Not all home insurance policies will cover personal belongings inside your home, especially in the case where the borrower lives in a strata condo or townhouse complex. Not all home insurance policies will cover personal belongings inside your home, especially in the case where you live in a strata condo or townhouse complex. Contents insurance will pay for the damage or loss of your possessions while they’re inside your home. The coverage applies to things that are permanently attached to your house, including those that are considered contents.

Strata insurance

For those living in a condominium or townhouse complex, the strata corporations’ insurance will only cover common property assets, or fixtures built on a strata lot. For this reason, it is important for both landlords and tenants to purchase insurance to cover their needs, which will cover their household contents and damages to household fixtures. Some lenders will require this type of insurance and specify that it includes strata deductible coverage.

Conclusion

Mortgage loan insurance can be a great tool allowing homebuyers to enter the real estate market with as little as 5% of the selling price as a down payment.  

The good news is that the insurance premium can be added to the mortgage principal and will not affect the debt servicing ratios used for qualifying for the mortgage. It is important to evaluate your options, considering your financial situation and goals.  

With Mortgage Maestro‘s team of mortgage experts and extensive network of lenders, we can help first-time and even seasoned homebuyers find the best mortgage and default insurance rates. Using our 50 years of combined mortgage, financing, and business experience, our agents will provide unbiased financial advice, do all the heavy lifting for you, and make sure you find the best possible solution at the best price. 

Contact us today and we’ll have a mortgage professional assigned to you immediately. 

Frequently Asked Questions

If you want to purchase a home with less than 20% as a down payment, the Government requires you to have mortgage insurance to protect the lender against the risk of default. 

Mortgage insurance becomes optional with more than 20% down payment from the homebuyer. It is also not available when the purchase price is $1,000,000 or more.

It’s an insurance to protect mortgage lenders against the risk of default. Mortgage insurance is required in high-ratio insured mortgages, where borrowers put less than 20% of the purchase price of the home as a down payment. 

When you receive a mortgage covered by mortgage loan insurance, the lender will be paid if the borrower defaults on their payments. The lender is protected, not the borrower. 

 

The answer depends on your financial situation and goals. If you want to enter the real estate market with a modest down payment (less than 20% of the selling price), mortgage insurance allows you to do that. In addition, since mortgage insurance alleviates some of the risk to the lender, borrowers can typically enjoy lower interest rates on these types of mortgages. 

 

NOTE: No one can accurately or consistently predict the best time to sell or buy in the housing market. On average, the best time to buy is as soon as you have enough down payment to qualify for a mortgage, insured or not. History is full of people who waited to save more of a down payment only to have home values increase more than they could save in the extra time it took them to save more money. They could have benefited from the housing market increase instead of being hurt by it.